What Is BitGold?

What Is BitGold?

Bit gold was one of the earliest attempts at creating a decentralized digital currency, proposed by blockchain pioneer Nick Szabo in 1998. Although the Bit gold project was never implemented, it’s often regarded as being the direct precursor to Satoshi Nakamoto’s Bitcoin Protocol.

Bitcoin and BitGold

There are many similarities between Bitcoin’s architecture and the Bit gold proposal, particularly in the technical mechanisms used to process transactions and secure the decentralized network.

Both Bitcoin and Bit gold are powered by a POW-based consensus algorithm in which computing power is spent to solve cryptographic puzzles. The solution to those puzzles is then processed through a Byzantine Fault Tolerant(BFT) peer-to-peer network. Finally, a cryptographic hash chain is created to link the most recent puzzle’s solution to the outcome of the following one, thereby validating blocks of transactions. This process for posting transactions to the network is consistent between Bitcoin and Bit gold.

Bitcoin is distinguished for solving the double-spending problem, which the Bit gold proposal could not at the time. Bit gold’s proposal called for a Byzantine method that relies on a quorum of network addresses rather than a quorum of(hash) computing power. This made the Bit gold network overly vulnerable to Sybil attacks. Bitcoin, on the other hand, added block confirmations to successfully protect against double-spending.

Bitcoin successfully realized the intent of Bit gold and is currently a fully functional protocol, serving roughly 20 million users globally, as of May 2018. The two protocols draw such close parallels that people often speculate about Nick Szabo being the anonymous Bitcoin creator, Satoshi Nakamoto(despite his denial.)

Why Was BitGold Created?

Bit gold was inspired by inefficiencies of the traditional financial system and the use of precious metals as currency.

Traditional Financial System Inefficiencies

Szabo points out that the traditional financial system requires parties to invest a great deal of trust in order for transactions to take place. For example, If somebody were to accept a loan from a bank, the bank must then trust that person with repaying the loan as agreed. Similarly, clients of a bank must trust that their money is properly secured and not being misappropriated by the bank.

Transacting through trust-based systems leaves opportunity for costly problems such as fraud or theft. A study conducted by Lexis Nexis in 2009 showed that merchants in the United States are losing approximately $190 billion a year to credit card fraud. The traditional financial system’s consistent large cost of losses and siloed architecture motivated Szabo.

Bit gold was introduced to provide a more trustless model for transacting. Szabo’s presentation at the 2015 Bitcoin Investor Conference helped highlight the underlying purpose of Bit gold as being“software to minimize vulnerabilities of all parties to each other.”

When asked about the intent of Bit gold, Nick Szabo explained,“I was trying to mimic as closely as possible, in cyberspace, the security and trust characteristics of gold, and chief among those is that it doesn’t depend on a trusted central authority.” Szabo’s response was describing the defining characteristics of a decentralized network, which Bitcoin successfully implemented a little over a decade later.

BitGold as an Improvement to Precious Metals as Currency

Bit gold was an attempt to replicate the economic properties of gold(gold’s unforgeable value) while improving its security properties.

Szabo argues that gold has historically lacked security. He references historical events such as the Spanish looting of the Aztecs and the English looting of the Spanish to acknowledge that physical gold can be acquired through force. Szabo also discusses contemporary political threats, giving the example of President Franklin D. Roosevelt’s executive order of 1933, which required Americans to surrender much of their gold to the federal government.

The Bit gold proposal was revolutionary in that it utilized advanced principles of computer science(likeencryption) to devise a new, trustless financial system. The proposed decentralized network offers individuals a degree of monetary sovereignty that physical gold could not. Bitcoin expert Trace Mayer describes monetary sovereignty for individuals as“a way that people can hold the private keys to their own wealth.”

Possessing your wealth first-hand is quite directly the purpose of owning gold, but decentralized financial networks, like that proposed by Bit gold, suggest that personal wealth control can be accomplished in a more secure, digitized, and trustless manner.

Benefits Proposed By BitGold

Bit gold’s trustless financial model proposed a set of unprecedented benefits for users. In particular, Szabo envisioned two key features of a trustless system:

Independence From Financial Institutions

Through a decentralized Bit gold network, users could transact securely without needing to trust or pay a financial institution to administer those transactions. The Bit gold network itself would provide the functionality of accurately tracking user account balances and processing legitimate transactions. Additionally, users are in possession of the private keys to their own wealth(monetary sovereignty.)

These characteristics in combination meant that transactions and storing money could take place virtually and independently, removing the dependence from financial institutions.

Seamless Operation Across Borders

The traditional financial system has many silos. Sending money across borders can take anywhere from a couple of days to weeks to fully go through. This is because banks must undergo a very rigid and regulated process to send money to other financial institutions before those funds can reach the intended party.

Decentralized networks like Bitcoin and Bit gold remove these silos and create the ability to process cross-border transactions within minutes. Again, these benefits were not realized with Bit gold since the model was never implemented, but are currently being realized through Bitcoin’s Protocol.

Final Thoughts

After discussing the inefficiencies of both precious metals and trust-based financial systems, Nick Szabo puts forth the vision for Bit gold:“Thus, it would be very nice if there were a protocol whereby unforgeably costly bits could be created online with minimal dependence on trusted third parties, and then securely stored, transferred, and assayed with similar minimal trust. Bit gold.”

Key Takeaways

Bitgold was the first feasible proposal of a decentralized financial network.

Nick Szabo conceived of Bit gold after addressing inefficiencies of the traditional financial system and the use of precious metals as currency.

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